Western Canada Select (the benchmark for Canadian heavy crude prices) is now above $70 per barrel. Differentials have shrunk for a record $41 discount seen in December down to $26 per barrel a major improvement.
The widening differentials were blamed on rising production, tight pipeline capacity and a series of refinery outages. But guess what? None of these problems have been solved in order to explain this recovery in price. While the fundamentals are still the same, this recovery provides a nice hedging opportunity for producers.
Heavy oil producers are budgeting a WCS price between $60 and $70 for 2013. None of them is sitting on his hands waiting for a recovery in prices. From my talks with a few management teams, railing is providing relief and in some cases a substantial increase to the price received when differentials widen.
Palliser (TSXV-PXL) is still my??favourite??heavy oil vehicle for a few simple reasons;
- They have 15 consecutive quarters of growth.
- Conservative budgeting using $63 WCS
- Can rail >50% of production by end of the year (>30% by the end of Q1)
- Spending weighted to the 2nd??half of the year
The last point is interesting as they will be in a position to up guidance if the expected improvement in heavy oil prices materializes. ??The market loves it when a company ups its guidance rather than miss it for whatever reason. If not, railing is a natural hedge against differentials as your production is sold in different markets.
Finally, railing oil comes with its own set of challenges and in no way hedges a drop in the price of oil (WTI or Brent) it is linked to.
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Have a great weekend!